The perils of short term thinking in business – JUL 2022

The perils of short-term thinking in business. “Short-termism”.

I like gardening and when I plant something new, I tend to overly look after it for a while. However, no matter how much I water and fertilise any new plant, it’s invariably grows at a pace largely determined by nature, not by me. The systems in nature can’t be rushed, yet we humans think we know better when it comes to the systems we build.

Take the world of business – it’s built on the notion of fast, faster, fastest. We want instant sales, instant profits and instant growth. We want it now and we’re not prepared to wait. Investors and analysts demand quick returns and this drives corporations to manage to monthly or quarterly outcomes.

The constant pressure to deliver instant results has created a business cancer – short-termism. The effect of short-termism on capitalism is well documented. It has led to misplaced priorities which are not in the long-term best interests of shareholders or society at large. What looks like success today can inhibit a company’s competitive position tomorrow.

The dangers of short-term thinking were evident in the global financial crisis. The manic pursuit of quick profits drove the speculative housing bubble in the US. Both borrowers and lenders saw real estate as a get-rich-quick scheme. Rampant short-termism drove the securitisation of mortgages that performed poorly in the long-term but generated lucrative fees in the short-term.

In a world of sound-bite journalism, the media fuels short-term thinking by lauding or disparaging companies based on the achievement of current earnings targets. Asset managers add to the problem by not providing better incentives to encourage long-term growth. And short-term investors like hedge funds perpetuate the here-and-now mentality.

Short-termism has become endemic in society. We want QUICK fix surgery to rectify imperfections. We crave crash diets to lose weight FAST. We consume energy drinks to heighten alertness NOW. We expect politicians to respond to tracking polls TODAY. And we demand that customer service and approval times be RAPID.

Some argue that our modern world has made us more impatient. In reality, our craving for quick fixes and instant gratification is biological. The short-term outlook of humans is hard-wired into the emotion side of our brains which focuses on immediate matters. Not surprisingly, this short-term genetic disposition is reflected in our institutions.

Politicians seldom plan beyond the current election cycle as the distant future is rarely on the radar of voters. So, the short-term need to win elections trumps the long-term need for policy reform including in Australia, big decisions on major infrastructure. Thus, as an example, Sydney’s need for a second airport was a political minefield for over 53 years – up until 2014 when the Abbott federal government approved it.

Up until 2014 almost everyone supported a second airport for Sydney, but no one wanted it in their backyard. Importantly the consequence of this short-termism lack of action has impacted on Sydney’s world standing. Sydney’s second international airport is anticipated to be up and running by early 2027 but it will take another 15 years after that for it to be fully operational with a second runway.

Unlike Kingsford-Smith International Airport, Badgerys Creek airport – to be officially known as Western Sydney International (Nancy-Bird Walton) Airport will operate on a 24/7 basis.

One-airport cities are the modern versions of one-horse towns. Yet Australia’s largest and busiest city still has only one airport (until 2027) while New York has six, London has five, Paris has three and Tokyo has two airports. Sydney, quite rightly, calls itself a major global city, but is notable among metropolises for having only one airport.

As a society, we don’t plan adequately for the future as politicians align their agendas with short-term focussed voters. Opinion polls and minority groups unduly influence policy formulation resulting in long-term economic credibility being sacrificed for short-term populist reforms.

To be sure, we get the politicians we deserve and we also get the media we deserve. As a society, we would rather read about the sordid private lives of celebrities than have a serious debate about the long-term benefits of public policy. As citizens, therefore, we are sadly complicit with falling standards and the dangerous focus on the short-term.

All that said, how do we beat short-termism thinking in business? By being strong and true to what you know is right. As a practical example, there were three notable occasions in my funds management career where I had to fight incredibly hard with both stakeholders and investors in funds that I was managing, around criticisms that I needed to “do better” with my returns.

On each occasion I refused to adopt what was later proven (including after the GFC) to be reckless investment policies and procedures which only pandered to short term greed instead of long-term stability and growth. On two of these occasions, it nearly cost me my job as I would not yield to the short-termism thinking prevailing at the time and yes, some investors did abandon me but interestingly most came back, when their alternate investments went sour.

One of those occasions was when I rejected investing into Subprime US loans to obtain a significant short-term lift in the return on surplus cash in the multibillion-dollar fund, I was managing at the time. Why? Because the returns being offered seemed to me to be unrealistic, risky and unsustainable, and so I rejected this on the basis of long-term stability and of course I was proven right.

Interesting fund managers, big and small all over the world were sucked into the subprime “sting” and in Australia, they included semi government authorities, benevolent institutions and local governments. It is estimated that over $1 trillion was lost globally by this short-term thinking!

Proudly, I finished my full-time funds management career with never having lost one cent of investor money. Sometimes the scoreboard does say it all as well as providing a guiding light as to how to rebuild for the future; until that future gives rise to the next wave of short-termism thinking!

My message to all business managers and owners is to be strong and visionary and plan for tomorrow and ensure your actions today are aligned to those plans.

Also, let determination guide you as “the race is not always to the swift but to those who keep on running” (Proverb)

John (JT) Thomas

This opinion piece is provided by John (JT) Thomas, a 46-year veteran of the financial services industry and since 1987 a specialist in commercial mortgage funds. Considered by many to be the father of the modern commercial mortgage fund sector, JT helped establish and then managed – for 17 years – what became the largest and most successful commercial mortgage fund in Australia – The Howard Mortgage Trust – with assets exceeding $3 billion. Under JT’s stewardship, investors never lost one cent of their investments and indeed, investors always received competitive monthly returns. JT was also Chair of the $40 billion mortgage trust industry sector working group.

JT has been proudly involved with Princeton for eight years and sits on both the Princeton Credit Committee and the Princeton Compliance Committee as well as being an advisor to the Princeton Board.